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Monday, 8 April 2013

Islamic finance and its Asean dynamics

Islamic Finance has developed into a $1tn global business with the dynamics to reach far more in the near future. The epicentres of this industry are in the Middle East and Asean, with sizeable cash flow between the two regions. Though contributing only a fraction of the world’s total banking assets, Islamic financial products’ resilience to global crises has given the industry credibility in its use as an alternative to conventional banking. Thus, the potential for a further collaboration between the two centres for Islamic banking is huge, especially between financial hubs such as Qatar and Malaysia.

However, a recently published report by Inside Investor sponsored by Barwa Bank has shown that there are still a number of actions necessary to increase the role and improve the standing of Islamic finance on the global stage. The fact that consensus remains divided among Islamic finance experts is telling of the industry’s infancy and lack of any global standardisation organisation.

Efforts have been made to unify practices, however, in the form of the establishment of the Islamic Liquidity Management Corporation (IILM) in Kuala Lumpur, a body of central banks, monetary authorities and multilateral organisations tasked with facilitating cross-border Islamic liquidity management. The creation of the Islamic Interbank Benchmark Rate (IIBR) in 2011, the industry’s equivalent to Libor, also marked an innovative step forward. It was an initiative sponsored by Thomson Reuters, which shows that Western institutions are also highly involved and interested in the industry.

In Qatar, Islamic banking was a largely underrepresented sector until 2011, when the Qatar Central Bank issued a circular instructing local conventional commercial banks to discontinue their Islamic operations by the end of the year. The main provisions of this circular were that conventional commercial banks should not accept new Islamic deposits, and new Islamic finance products should not be extended by conventional banks.

This prompted a boom for Shariah-only banks, which since have grown remarkably and are now on the outlook for potential partners, especially in the thriving Islamic banking markets abroad, first of all in Southeast Asia.

And there is plenty of room for collaboration. Today, Malaysia is home to the world’s largest Islamic private-debts securities market registered at $35bn, making Kuala Lumpur the world’s largest Islamic financial hub. To further strengthen this position, the country has set up ambitious development plans for the sector, which include becoming an intellectual and capital centre for the entire industry. It makes great sense to establish ventures in Islamic banking in Malaysia to further penetrate the region, catering to, for example, a massive market of Indonesia’s 204mn Muslims or even Thailand’s 3.2mn, both countries where Islamic banking is in demand, but the supply is improvable.

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